Deck 15: Investments and International Operations

Question 1

When an investor company owns more than 25% of the voting stock of an investee company, it has a controlling influence.

Answer 1

False

Question 2

Long-term investments can include funds earmarked for special purposes such as bond sinking funds.

Answer 2

True

Question 3

The equity method with consolidation is used in accounting for long-term investments in equity securities with controlling influence.

Answer 3

True

Question 4

An investor purchased $50,000 of bonds and holds them to maturity. The investor's journal entry to record the proceeds should include a debit to Cash for $50,000 and a credit to Long-Term Investments for $50,000.

Question 5

Long-term investments are usually held as an investment of cash for use in current operations.

Question 6

Debt securities are recorded at cost when purchased.

Question 7

Comprehensive income refers to all changes in equity during a period except those from owners' investments and dividends.

Question 8

Long-term investments include investments in land or other assets not used in a company's operations.

Question 9

A controlling investor is called the parent, and the investee company is called the subsidiary.

Question 10

A company holds $40,000 of 7% bonds as a held-to-maturity security. Assuming all prior interest entries have been accounted for, the bondholder's journal entry to record receipt of the semiannual interest payment includes a debit to Cash for $2,800 and a credit to Interest Revenue for $2,800.
$40,000 x 7% x ½ year = $1,400

Question 11

Any cash dividends received from equity securities are recorded as Dividend Expense.

Question 12

Bond sinking funds are examples of short-term investments.

Question 13

Investments in trading securities are accounted for using the equity method with consolidation.

Question 14

Equity securities reflect a creditor relationship such as investments in notes, bonds, and certificates of deposit.

Question 15

When an equity security is sold, the sale proceeds are compared with the cost, and if the cost is greater than the proceeds, a gain on the sale of the security is recorded.

Question 16

Short-term investments are intended to be converted into cash within the longer of one year or the current operating cycle of the business, and are readily convertible to cash.

Question 17

Debt securities are recorded at cost when purchased, and interest revenue for investments in debt securities is recorded when earned.

Question 18

When the cost of a short-term held-to-maturity debt security is different from the maturity value, the difference is amortized over the remaining life of the security.

Question 19

A company received dividends of $0.35 per share on 300 shares of stock. The journal entry to record this transaction would be to debit Cash for $105 and credit Dividend Revenue for $105.

Question 20

Cash equivalents are investments that are readily converted to known amounts of cash and mature within three months.

Question 21

Trading securities are securities that are purchased by trading other securities rather than by paying cash.

Question 22

Investments in held-to-maturity debt securities are always current assets.

Question 23

The price of one currency stated in terms of another currency is called a foreign exchange rate.

Question 24

Accounting for long-term investments in held-to-maturity securities requires companies to record interest revenue as it is earned.

Question 25

Net profit margin reflects the percent of net income in each dollar of net sales.

Question 26

Consolidated financial statements show the financial position, results of operations, and cash flows of all entities under the parent's control.

Question 27

If the exchange rate for Canadian and U.S. dollars is 0.7382 to 1, this implies that 2 Canadian dollars will buy 1.48 worth of U.S. dollars.
$2 x 0.7382 = $1.48

Question 28

Foreign exchange rates fluctuate due to many factors including changing political and economic conditions.

Question 29

Return on total assets can be separated into the profit margin ratio and total asset turnover.

Question 30

Equity securities giving an investor significant influence over an investee are always considered short-term investments.

Question 31

Multinational corporations can be U.S. companies with operations in other countries.

Question 32

Profit margin is net sales divided by net income.

Question 33

A company should report its portfolio of trading securities at its fair value.

Question 34

Held-to-maturity securities are equity securities a company intends and is able to hold until maturity.

Question 35

Trading securities are always reported as current assets.

Question 36

Consolidated statements are prepared as if a company is organized as one entity, with the amounts allocated for subsidiaries reported in the investment accounts.

Question 37

Unrealized gains and losses on trading securities are reported on the income statement.

Question 38

A company has net income of $130,500. Its net sales were $1,740,000 and its average total assets were $2,750,000. Its profit margin equals 7.5%.
Profit margin = $130,500/$1,740,000 = 7.5%

Question 39

A company has net income of $130,500. Its net sales were $1,740,000 and its average total assets were $2,750,000. Its total asset turnover equals 4.7%.
Asset turnover = $1,740,000/$2,750,000 = 0.63

Question 40

All companies desire a low return on total assets.

Question 41

An investor presumed to have significant influence owns as least 20% but not more than 50% of another company's voting stock.

Question 42

When using the equity method for investments in equity securities, the investor records the receipt of cash dividends as revenue.

Question 43

When using the equity method, receipt of cash dividends increases the carrying (book) value of an investment in equity securities.

Question 44

A U. S. Company's credit sale to an international customer allowing payment to be made in a foreign currency requires using the same exchange rate for the date of sale and the cash payment date.

Question 45

The cost method of accounting is used for long-term investments in equity securities with significant influence.

Question 46

On May 15, Briar Company purchased 10,000 shares of Broder Corp. for $80,000. The securities are considered available-for-sale securities. On September 30, the stock had a market value of $85,000. The $5,000 difference must be reported on the income statement as a $5,000 gain.

Question 47

To prepare consolidated financial statements when a U. S. parent company has an international subsidiary, the international subsidiary's financial statements must be translated into U.S. dollars.

Question 48

On May 1, Franke Co. purchases 2,000 shares of Computech stock for $25,000. This investment is considered to be an available-for-sale investment. On July 31 (Franke's year-end), the stock had a market value of $28,000. Franke should record a credit to Unrealized Gain-Equity for $3,000.

Question 49

Long-term investments are reported in the:

A) Current asset section of the balance sheet.
B) Intangible asset section of the balance sheet.
C) Non-current section of the balance sheet called long-term investments.
D) Plant assets section of the balance sheet.
E) Equity section of the balance sheet.

Question 50

Brown Company sold supplies in the amount of 15,000 euros to a French company when the exchange rate was $1.15 per euro. At the time of payment, the exchange rate decreased to $1.12. Brown must record a loss of $450.

Question 51

Micron owns 30% of JVT stock. Micron received $6,500 in cash dividends from its investment in JVT. The entry to record receipt of these dividends includes a debit to Cash for $6,500 and a credit to Long-Term Investments for $6,500.

Question 52

Management's intent determines whether an available-for-sale security is classified as long-term or short-term.

Question 53

Short-term investments:

A) Are securities that management intends to convert to cash within the longer of one year or the current operating cycle, and are readily convertible to cash.
B) Include funds earmarked for a special purpose such as bond sinking funds.
C) Include stocks not intended to be converted into cash.
D) Include bonds not intended to be converted into cash.
E) Include sinking funds not intended to be converted into cash.

Question 54

Long-term investments in debt securities not classified as trading or held-to-maturity securities are classified as available-for-sale securities.

Question 55

Long-term investments in available-for-sale securities are reported at fair value on the balance sheet.

Question 56

Long-term investments:

A) Are current assets.
B) Include funds earmarked for a special purpose such as bond sinking funds.
C) Must be readily convertible to cash.
D) Are expected to be converted into cash within one year.
E) Include only equity securities.

Question 57

Any unrealized gain or loss for the portfolio of available-for-sale securities is reported on the income statement in the other gain or loss section.

Question 58

If a U. S. company's credit sale to an international customer allows payment to be made in a foreign currency, the transaction is recorded using the exchange rate on the date of sale.

Question 59

If a long-term investment in an equity security gives the investor significant influence over the investee, the investment is classified as available-for-sale.

Question 60

Sanuk purchased on credit $\leq$ 20,000 worth of parts from a British company when the exchange rate was $\leq$ 1.66 per British pound. At the year-end balance sheet date the exchange rate increased to $1.69. Sanuk must record a gain of $600.

Question 61

At the end of the accounting period, the owners of debt securities:

A) Must report the dividend income accrued on the debt securities.
B) Must retire the debt.
C) Must record a gain or loss on the interest income earned.
D) Must record a gain or loss on the dividend income earned.
E) Must record any interest earned on the debt securities.

Question 62

A company owns 9% bonds with a par value of $100,000 that pay interest on October 1 and April 1. The amount of interest accrued on December 31 (the company's year-end) would be:

A) $750.
B) $1,500.
C) $2,250.
D) $4,500.
E) $9,000.

Question 63

Short-term investments in held-to-maturity debt securities are accounted for using the:

A) Fair value method with fair value adjustment to income.
B) Fair value method with fair value adjustment to equity.
C) Cost method with amortization.
D) Cost method without amortization.
E) Equity method.

Question 64

Consolidated financial statements:

A) Show the results of operations, cash flows, and the financial position of all entities under a parent's control.
B) Show the results of operations, cash flows, and the financial position of the parent only.
C) Show the results of operations, cash flows, and the financial position of the subsidiary only.
D) Include the investments account on the balance sheet.
E) Do not include a balance sheet.

Question 65

Comprehensive income includes

A) Revenues and expenses reported in the income statement.
B) Gains and losses reported in the income statement.
C) Unrealized gains and losses on long-term available-for-sale securities.
D) All changes in equity for a period except those due to investments and distributions to owners.
E) All of these.

Question 66

Long-term investments in held-to-maturity debt securities are accounted for using the:

A) Fair value method with fair value adjustment to income.
B) Fair value method with fair value adjustment to equity.
C) Cost method with amortization.
D) Cost method without amortization.
E) Equity method.

Question 67

A company purchased $60,000 of 5% bonds on May 1 at par value. The bonds pay interest on February 1 and August 1. The amount of interest accrued on December 31 (the company's year-end) would be:

A) $250.
B) $500.
C) $1,250.
D) $2,500.
E) $3,000.

Question 68

A controlling influence over the investee is based on the investor owning voting stock exceeding:

A) 10%.
B) 20%.
C) 30%.
D) 40%.
E) 50%.

Question 69

Griggs Company holds $50,000 of 8% bonds as a held-to-maturity security. Which of the following is the correct journal entry to record the receipt of the semiannual interest payment?

A) debit Cash, $4,000; credit Long-Term Investments-HTM, $4,000.
B) debt Cash, $2,000; credit Long-Term Investments-HTM, $2000.
C) debit Cash, $2,000; credit Interest Revenue, $2,000.
D) debit Unrealized Gain-Equity, $2,000; credit Cash, $2,000.
E) debit Cash, $4,000; credit Unrealized Gain-Equity, $4,000.

Question 70

NSC Corporation has invested in 10% of the outstanding stock of VC Corporation. NSC intends to actively manage this investment for profit. This investment is classified as:

A) an available-for-sale security.
B) a held-to-maturity security.
C) a trading security.
D) a significant influence security.
E) a controlling influence security.

Question 71

Debt securities:

A) Can be short-term investments.
B) Can be long-term investments.
C) Can have a cost higher than the maturity value of the debt security.
D) Can have a cost lower than the maturity value of the debt security.
E) All of these.

Question 72

Long-term investments include:

A) Investments in bonds and stocks that are not readily convertible to cash.
B) Investments in marketable stocks that are intended to be converted into cash in the short-term.
C) Investments in marketable bonds that are intended to be converted into cash in the short-term.
D) Only investments readily convertible to cash.
E) Investments intended to be converted to cash within one year.

Question 73

An investor purchased at par value $75,000 of Cort's 8% bonds, that mature in three-years. The bonds pay interest semiannually on June 1 and December 1. The investor plans to hold the bonds until they mature. When the bonds mature, the investor should prepare the following journal entry:

A) debit Long-Term Investments-HTM, $75,000; credit Cash, $75,000.
B) debit Cash, $6,000; credit, Unrealized Gain-Equity, $6,000.
C) debit Cash, $75,000; credit Long-Term Investments-HTM, $75,000.
D) debit Unrealized Gain-Equity, $6,000; credit Cash, $6,000.
E) debit Cash, $75,000; credit Long-Term Investments-Trading, $75,000.

Question 74

All of the following statements regarding equity securities are True except:

A) Equity securities should be recorded at cost when acquired.
B) Equity securities are valued at fair value if classified as trading securities.
C) Equity securities are valued at fair value if classified as significant influence securities.
D) Equity securities are valued at fair value if classified as available-for-sale securities.
E) Equity securities classified as available-for-sale record the dividend revenue when received.

Question 75

A company paid $37,800 plus a broker's fee of $525 to acquire 8% bonds with a $40,000 maturity value. The company intends to hold the bonds to maturity. The cash proceeds the company will receive when the bonds mature equal:

A) $37,800.
B) $38,325.
C) $40,000.
D) $40,525.
E) $43,200.

Question 76

The controlling investor is called the:

A) Owner.
B) Subsidiary.
C) Parent.
D) Investee.
E) Senior entity.

Question 77

At acquisition, debt securities are:

A) Recorded at their cost, plus total interest that will be paid over the life of the security.
B) Recorded at the amount of interest that will be paid over the life of the security.
C) Recorded at cost.
D) Not recorded, because no interest is due yet.
E) Recorded at cost plus the amount of dividend income to be received.

Question 78

Accounting for long-term investments in equity securities with controlling influence uses the:

A) Controlling method.
B) Equity method with consolidation.
C) Investor method.
D) Investment method.
E) Consolidated method.

Question 79

Long-term investments can include:

A) Held-to-maturity debt securities.
B) Available-for-sale debt securities.
C) Available-for-sale equity securities.
D) Equity securities giving an investor significant influence over an investee.
E) All of these.

Question 80

Everrine Corporation owns 3,000 shares of JRW Corporation. JRW Corporation has 25,000 shares of stock outstanding. JRW paid $4 per share in cash dividends to its stockholders. The entry to record the receipt of these dividends is:

A) Debit Cash, $12,000; credit Long-Term Investments, $12,000.
B) Debt Long-Term Investment, $12,000; credit Cash, $12,000.
C) Debit Cash, $12,000; credit Dividend Revenue, $12,000.
D) Debit Unrealized Gain-Equity, $12,000; credit Cash, $12,000.
E) Debit Cash, $12,000; credit Unrealized Gain-Equity, $12,000.